World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Thursday, December 18, 2008

Well, that was interesting. A very mixed day for me, I’ll be glad when we get out of this same old range.

On the day the DOW closed down 220 points – satisfying the large price move called for by the small movement in the McClelland Oscillator yesterday. The S&P finished down 2.1%, the NDX lost 1.7%, and the RUT was down the least, losing 1.5%.

Noteworthy was IYR which lost 7.9% today. That’s what happens when people get too excited about rate cuts that really don’t mean much of anything because short term rates were already zero, before the Fed moved – they are followers, not leaders. Funny, that same thing can be said about children in general.

Also noteworthy was a further decline in oil beneath $37 a barrel, and gold gave back some of its recent gains.

XL Capital – an old favorite short of mine – jumped a little today on speculation that Uncle Warren would be interested in buying. Without government backing, XL would have been a zero quite some time ago. Buffett can have ‘em, good luck.

A mixed day technically, let’s run it down in a bearish and bullish fashion, okay?

Bearish:

1. Major indices gave up the 50 day moving average. This is typical bear market action that has preceded previous declines in the past year.2. Volume today was higher than yesterday’s decline. Volume confirms price, but today’s volume did not exceed our last positive day’s volume on Tuesday.3. The SPX fast stochastic just entered overbought.4. We have attempted several times to break 920 on the S&P and have failed.5. The VIX reached its bottom Bollinger Band and bounced, producing a potential hammer.6. Fundamentals suck (sorry to be blunt, but that sums it up nicely).

Bullish:

1. Buy signals on the weekly, daily, and 30 minute stochastics.2. Tomorrow is Opex.3. Small positive divergence on RSI.4. Positive divergence with the VIX down on a down day.5. Potential new bullish triangle, just bounced off of bottom.6. Inverted H&S still in play.7. Seasonality.8. Turn date after Christmas.

As you can see, it’s a mixed bag and I can still see both sides. For those who may be new to following my updates, you can trust me when I say that I call a spade a spade when I see one! When I turn all bear, look out.

So, let’s go to the charts. Below is a weekly 1 year chart of TLT (20 year bond). Note the parabolic move and the extent to which the current candlestick is above the upper Bollinger. The chart below that is a TLT daily, 3 month chart. Again note that we closed above the upper Bollinger, day two in a row. Now, I know it’s not the brightest thing to stand in front of a freight train, but some of my very best plays have come from extreme conditions outside of the Bollingers. So, I did something I normally don’t and added a little to my short position here. I know, I know, breaking one of my own rules, but I am doing it very, very small only with money in my speculative account – this is not a big play yet and it is still high risk as rates can (and probably will) stay low for some time. However, if you look at the bond market during the Great Depression, equities had declined for a little more than a year and THEN the bond market came apart. Could the same thing happen here? Well, the government is now at zero, how much lower can rates go? Maybe I’m early, that’d be the story of my life!

Next chart is the SPX daily, 3 month. Note the new orange triangle. We pinned the bottom and bounced just prior to the close. Fast stochastic is overbought, and we closed beneath the 50dma. Truth is that the general shape of this formation is beginning to look bearish, but we still have the bullish things noted above in play.

Last chart is the VIX daily. Note the oversold stochastic. Also note that we bounced off the lower Bollinger band today and produced what may be a reversal hammer. It’s not perfect, but close, and needs confirmation. The other side of that, though, is why did the VIX go down on such a big down day for equities? Perhaps it’s a little too much complacency. With that in mind, I note that the TRIN closed all the way up at 2.23, pretty high.

So, I still see a mixed picture. I put on a very small long position when we hit 875 and will use that as a stop. Tomorrow is Opex, so I expect interesting things. We are oversold on the 60 and 30 minute stochastic and just rose out of oversold on the 10 minute. Thus I think the odds for some sort of a rally tomorrow are probably good, but I’m still bearish overall and not buying the BS.